How to Play Gold & the US Dollar

By: staff at DailyForex.com

The staff at DailyForex.com outlines how to play the uncertainty playing out across the global stage in the months ahead.

When talking to market practitioners, gold is treated as a currency. While it is not the currency of any specific country or political/economic union, gold has always been a safe-haven to which investors resort in times of crises. Alongside United States Treasury Bonds, and the Swiss franc, gold has traditionally benefitted from unrest in the markets.

The perception that physical ownership of gold will somehow preserve wealth even when other assets lose a lot their value has made it a metal whose price is not derived solely (or even, mainly) from supply and demand, both for the metal’s actual uses as a precious metal and for industrial purposes. Specifically, gold is sort of the anti-dollar currency and XAU/USD (the currency pair symbol for Gold vs. Dollar) tends to go down whenever the USD weakens.

A Bit More About Safe Havens

A few more words about safe-haven assets. Since 2010, when the crisis in Europe began to unfold, the Swiss Franc has steadily appreciated against the EUR. This strengthening of the CHF has had negative effect on the Swiss economy as it made exported Swiss goods more expensive and also burdened the tourism industry. In response to that, the Swiss National Bank (SNB) decided in September of 2011 to artificially devalue its own currency. The SNB sold francs in a quantity that brought the EUR/CHF to a level of 1.20 and pledged to step in and intervene in the markets to maintain this floor. More than a year later, the EUR is not much safer or attractive, yet the CHF is at around the same level. That commitment by the SNB effectively canceled the CHF’s status as a safe-haven for investors to park their money in, when uncertainly prevails.

About a month before the SNB action, Standard & Poor’s downgraded the US Treasuries to AA+, a notch shy of the perfect AAA assigned to US debt since, well, practically ever. Although the markets didn’t really respond to the downgrade with the same panic that followed other sudden downgrades like that, the signal was clear—no sovereign debt is immune.

After the CHF and US Treasuries lost their safe-haven status like that, the gold rallied. From below $1,400 per ounce, it reached just over $1,900 in less than a year. However, since its peak in August of last year, XAU has been very volatile. Specifically from the beginning of 2012, or more precisely, since a deal was reached on Greek debt, gold has become the worst performing precious metal.

Why is that? Why isn’t gold responding to all the bad news from Europe? How come we see little in the way of a permanent and decisive solution for the European crisis (as well as subdued growth in many other places in the world), and yet gold is stagnating?